There are two different financing terms available for businesses. These are short term financing and long term financing. In today’s economic environment following the financial collapse and Great Recession, many businesses require both types. The two types of financing involve more differences than only the time frames.
Short term financing is commonly utilized for the daily business operations’ funding and needs. This is also known as working capital. The financing terms for these short term facilities commonly require the short term loans to be paid back in a year or less.
Long term financing is more often utilized for the upkeep or purchase of fixed asset types. This might include a building or machinery that a firm owns. The financing terms for long term loans are for periods of time that are greater than a year.
Among the short term financing means are bank loans, bank overdrafts, trade credit, and leasing. For individuals, bank overdrafts prove to be the most common means of short term finance, since their finance terms permit an individual to draw out a greater amount of money that the person has in the bank, up to a predetermined amount.
Trade credit is useful for small businesses who may require the ability to buy goods and services or supplies before they receive payments and incoming receipts. With such trade credit facilities, the finance terms are commonly from thirty to ninety days to pay the full balance.
Long term financing might also involve bank loans, as well as corporate bonds or mortgages. With corporate bonds, a company is borrowing money from investors and members of the public. The financing terms of these types of instruments commonly require periodic interest payments that are known as coupon payments. The principal is then repaid on the agreed upon day. Many corporate bonds also feature a recall option that allows a company to pay off its long term debts early. This might be of interest to such a firm if they feel that they can borrow the funds for less money elsewhere or with lower interest rates.
Mortgages are extremely long term financing options made available to individuals or consumers for the purchase of a house or commercial property. These financing terms commonly run to thirty years or longer. Mortgages involve complex calculations for figuring out payments that often involve property taxes, mortgage insurance, and loan repayments.
Financing terms can also relate to the specifics of a particular loan, mortgage, or credit facility. They would spell out the interest rate, due dates of payments, and number of payments anticipated. In many cases, they would also specify the amount of interest that would be paid over the course of the loan or credit facility, as well as the penalties for not making the payments on time.